Inexperienced investors often shy away from making commercial property investments, assuming that only big business owners make such investments. While this is not entirely true, the low-risk residential properties do attract most investor’s attention.
However, an investment portfolio is incomplete without any commercial properties, and the investors who avoid risk in investment may miss out on the high return potential of CRE investments. Commercial investments offer a prospect to earn a greater profit than any other type of investment.
In fact, there are many other benefits of investing in commercial property. To understand them, we must first understand that CRE is a broad term consisting of a lot of different types of properties.
Let’s find some more details about what really constitutes commercial real estate.
How is Commercial Property Different from Other Types of Property?
Commercial properties significantly differ from other types of properties. The primary difference is that they are leased to businesses while other properties can be rented to individuals or families.
The next major difference is the capital turnover that a commercial property can bring. It has the unique advantage of turning in a high amount of capital or rent as compared to other types of properties. This mainly happens because of investments made by established businesses in premium marketplaces. There are a number of ways through which you can earn money from a commercial property. You can lease it, use it for your own business or hold it as an asset until its value appreciates over time.
When we talk about what constitutes commercial property, think about retail shops, office buildings, entertainment zone like malls, mixed-use buildings, hotels, or just land in a premium or upcoming prime location.
Why Invest in Commercial Property
Now that we know what actually constitutes commercial real estate, we are ready to examine the benefits of investing in a commercial property. Some of them are mentioned below:
1. High Income Potential
You can generate profit from a commercial property in multiple ways. The most common is through capital gain or leasing the property. Commercial properties often have multiple lease options. When you get multiple tenants on a single property, you will obviously benefit from it. The size of the property determines the number of tenants in it and the more the number of tenants, the more contribution they will make to your income.
The triple net leases and flexible lease terms also make investing in commercial property a profitable venture. Through triple net leases, you can save the operating cost of maintaining your property. The lease will pay for the everyday maintenance cost. This can also reduce the annual maintenance cost for you.
You can also regularize your income stream with a commercial property. The rental agreement for a commercial property is usually made for a duration of a few years. You will get a regular lease amount after a fixed duration of time and this can help stabilize the income.
The rate of return on investment in CRE is around 5-15%, which is much higher than other sources of investments such as stock dividends, that yield 2-3% of annual return. Thus, investing in commercial property holds a prospect to yield greater returns.
2. Equity Benefits
You also get equity benefits on commercial property. Leveraging helps to increase equity and get a better rate of return on investment. The rental value of a property increases over time and eventually, as your loans get paid off, your equity can get magnified. You can then invest in more assets and enjoy similar profits.
3. Asset appreciation
The value of CRE can appreciate greatly over time and there are various factors that influence the value of the property. The owner can raise the rent, remodel the property, or just increase the rent to meet costs.
Flexibility in lease terms allows greater returns to the investor. Land value and infrastructural improvements on the property can also raise its value over time. You also get reliable tenants in commercial properties. The lease agreement is pre-made so, the chances of things going wrong are less. At commercial locations, you will generally get corporate clients such as businesses, banks, retail, or hotels, etc. Dealing with such clients will most likely be smoother.
If the commercial property is based in a prime location, and you start getting some popular businesses as tenants, even more high-end tenants will follow and look for leasing a place in the same location. If you are not looking to lease the property because of whatever reason, holding a commercial property in a developing marketplace will also be beneficial.
4. Security
While CRE investments are not entirely safe, they still offer greater security than many other types of investments. Multiple occupancies help cover your operation costs because tenants are responsible for covering the main expenses of the property. In addition, a steady income also contributes to making CRE investments a secure option.
5. Hedge Against Inflation
Having a property during the time of inflation can seriously be helpful. During inflation, a property with multiple tenants that has high labor and replacement costs will rise significantly. In such a case, having a commercial property will be beneficial to the investor.
6. Multiple Options
There are many options that you can explore once you decide to invest in a commercial property. There are many different types of commercial properties that you can invest in, after examining the potential benefits that they can offer you.
Leasing a commercial property is the latest emerging trend in premium locations where it benefits both, the builder and the investor. The rent in such places is generally higher. With multiple commercial corners springing up in the Delhi-NCR region, the demand for commercial property investments is higher than ever before.
Conclusion
There is no investment that doesn’t involve risk. If you are up for taking a little risk and increasing your chance of getting a substantial return on your investment, you should consider investing in commercial property. Look for properties that have the benefit of a good location for increasing your potential returns even more.